Chartered Secretaries Qualifying Scheme Level 1

Financial Reporting and Analysis

Sample paper

Time allowed: 3 hours and 15 minutes (including reading time) Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room.

This examination paper is divided into two sections. Each question on this paper carries 25 marks. You must answer the compulsory question in Section A. Section B contains five questions. You must attempt three questions only from Section B.

ICSA, 2010

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Section A
(Compulsory question) 1. You are the company secretary of Highbury plc (Highbury) and the summarised draft accounts prepared for the year to 31 March 2010 contained the following information: Statement of comprehensive income for the year ended 31 March 2010 000 Revenue 12,296 Profit on sale of investments surplus to requirements 602 12,898 Cost of goods sold 7,376 Depreciation 556 Distribution, selling and marketing costs 3,307 Directors emoluments 400 Finance charge 72 Profit on ordinary activities before tax 1,187 Taxation 350 Profit for the year 837 Dividends paid 180 Retained profit for the year 657

2009 000 10,260 10,260 6,182 440 2,761 357 520 200 320 180 140

Statement of financial position at 31 March 2010 000 Non-current assets Land, buildings, plant and machinery at cost less depreciation Goodwill at cost Quoted investments at cost Current assets Inventories Trade receivables Cash at bank and in hand 2009 000

2,647 340 2,987 2,490 2,280 4,770 7,757 1,800 2,226 4,026 1,452 1,452 564 1,545 170 2,279 7,757

1,756 400 2,156 1,951 1,701 26 3,678 5,834 1,800 1,569 3,369 1,272 1,272 983 210 1,193 5,834

Equity and liabilities Called up share capital (1 shares) Retained earnings Non-current liabilities Provision for deferred taxation Current liabilities Bank overdraft Trade payables Corporation tax

(continued)

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In April 2009, Highbury added to its existing operations by acquiring the business assets of Wheatsheaf Ltd, a local competitor trading with a turnover of 2,000,000 per annum. The purchase price of 1,400,000 included acquisition of plant and machinery worth 700,000 and inventories worth 360,000. Required Prepare a report for the board of directors of Highbury on the companys financial progress during the year to 31 March 2010 and on its financial position at that date based on the information provided above. You should support your analysis with relevant accounting ratios covering: profit margins; return on investment; asset utilisation; and short-term liquidity. (25 marks)

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Section B
(Answer three questions from this section) 2. The summarised statements of comprehensive income and financial position of the Sturton group of companies (the Sturton group) for 2009 were as follows:

Statement of comprehensive income for the year ending 31 December 2009 2009 000 Revenue 61,345 Cost of sales - 45,890 Gross profit 15,455 Net operating expenses -10,190 Share of operating profits of associated company 780 Operating profit 6,045 Finance costs -666 Profit before tax 5,379 Taxation -3,100 Profit after tax 2,279 Attributable to: Equity holders of the parent company 1,593 Minority interest 686

(continued)

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Statement of financial position at 31 March 2009 2009 000 Assets Non-current assets Property, plant and equipment Goodwill at cost Investments in associated company Current assets Inventories Trade receivables Cash and cash equivalents 2008 000

5,400 1,250 940 7,590 3,344 4,009 1,111 8,464 16,054

3,250 800 575 4,625 4,020 3,955 888 8,863 13,488

Equity Parent company shareholders equity Share capital Other reserves Retained earnings Minority interest Total equity Non-current liabilities Long-term borrowings Deferred taxation Current liabilities Trade and other payables Short-term borrowings Taxation

1,396 556 2,893 4,845 666 5,511 3,006 825 3,831 4,443 1,555 714 6,712 16,054

1,346 345 1,300 2,991 540 3,531 2,708 746 3,454 3,896 2,040 567 6,503 13,488

You are provided with the following additional information: (i) Property, plant and equipment Balance at 1 January 2009 Additions Charge for the year Surplus on revaluation Disposals Balance at 31 December 2009 Carrying value at 31 December 2009 Cost 6,290 3,562 211 -1,796 8,267 5,400 Depreciation 3,040 1,295 -1,468 2,867

Property, plant and equipment was disposed of at carrying value. (ii) Taxation Corporation tax charge for the year Provision for deferred taxation Associated company

2,688 79 333 3,100 (continued)

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Required (a) Prepare a consolidated statement of cash flows of the Sturton group for the year ended 31 December 2009 using the indirect method in accordance with IAS 7 Statement of Cash Flows. (18 marks) Based on the content of the cash flow statement prepared under (a), above, prepare a memorandum explaining to the board the main financial developments at the Sturton group during 2009. (7 marks) (Total: 25 marks) The following draft accounts have been prepared in respect of Priory plc (Priory) for the year to 31 March 2010. Statement of comprehensive income for the year ending 31 March 2010 Notes Revenue Cost of sales Provision for closure costs Distribution, selling and marketing costs Operating profit Dividend from Woodman Ltd Profit for the period 000 31,400 5,130 8,511 000 50,600

(b)

3.

(i)

(ii)

45,041 5,559 200 5,759

Statement of financial position at 31 March 2010 Assets Tangible non-current assets Freehold property Plant and equipment at cost Less: Accumulated depreciation Intangible non-current assets Goodwill Research and development Current assets Inventories Other current assets less liabilities Equity Ordinary share capital (1 ordinary shares) Retained earnings at 1 April 2009 Retained earnings for the year to 31 March 2010 Notes (iii) 9,000 6,200 000 000 15,000 2,800 17,800 1,100 1,720 3,250 1,929 25,799 17,000 3,040 5,759 25,799

(iv) (v) (vi)

(continued)

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The following further information is provided in respect of the items indicated by Notes (i) (vi) above. (i) On 2 March 2010, the directors of Priory made the decision to close down a lossmaking division with effect from 30 September 2010. The figure contained in the accounts is the provision for expected losses between 1 April 2010 and 30 September 2010 together with the estimated costs associated with the closure. At 31 March 2010, the closure decision remained confidential. Priory acquired 25% of the ordinary share capital of Woodman Ltd on 1 April 2009 and, through representation on the board of directors, is able to exercise a significant influence over the financial and operating policies of that company. The profit made by Woodman Ltd in the year to 31 March 2010 amounted to 1,400,000. The purchase consideration was 9,000,000 and was satisfied by the issue of 3 million ordinary shares of 1 each in Priory. No entry has been made in the above accounts of Priory in respect of the acquisition. (iii) Priorys freehold property was professionally revalued on 31 March 2010 at 22,000,000. It has been decided to use this figure in the accounts in order to show a fairer view of the financial position of the company. This amount represents goodwill arising on the acquisition of the tangible and intangible assets of a local business, Trinity Ltd, on 1 April 2009. The goodwill is estimated to be worth 1,010,000 on 31 March 2010. The balance is made up of the following: Development expenditure brought forward on 1 April 2009 of 1,350,000. This was incurred to develop a new product which came on to the market on 1 April 2009. It is estimated that the new product will prove highly profitable for a period of nine years from that date. Research expenditure of 370,000 incurred during the year to 31 March 2010 in the endeavour to invent a new design for one of Priorys leading products. The directors are convinced that this will result in the creation of an improved design in due course.

(ii)

(iv)

(v)

(vi)

The cost and net realisable value of the companys inventories, analysed in categories of similar items, are as follows: Category A B C Cost 000 800 1,170 1,280 Net selling price 000 660 2,100 1,970

(continued)

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Required (a) Explain the required treatment of items (i), (ii) and (iv), above, in order to comply with the relevant accounting standards. (9 marks) Prepare the accounts of Priory for the year ended 31 March 2010 revised, as appropriate, to comply with standard accounting practice so far as the available information permits. (16 marks)

(b)

Notes: Ignore taxation. Calculations to the nearest 000. Assume there were no differences between the purchase price and fair value of the net assets of Woodman Ltd at the acquisition date. Assume all figures to be material. (Total: 25 marks) The following issues have arisen in relation to the accounts of Dundee plc (Dundee) for the year ending 31 December 2009: (i) Dundee received from a customer, during December 2009, an advance payment of 3 million for the supply of services over the next three years. The directors plan to include this amount as sales revenue for 2009. An action has been brought against Dundee for negligence during 2009. Dundees lawyers have been instructed to vigorously defend the action, but tell the directors that they should expect to lose the case, which would cost up to 1.5 million. A court decision is not expected for at least a year. Dundees Chief Accountan t believes that the company should always take the most prudent approach when valuing assets for inclusion in the accounts. A property was purchased at the beginning of 2009 for 10 million. On 31 December 2009 the property is expected to be worth 16 million, and the finance director of Dundee is not sure which figure should be used when preparing the accounts. Dundee owns a machine with a carrying value of 50,000 at 31 December 2009 which is now obsolete. The directors have discovered that the machine could be sold to a South American company, in January 2010, for 50,000. It would cost Dundee 62,000 to transport the machine to South America. The directors are unsure whether the machine should be treated as an asset in the accounts.

4.

(ii)

(iii)

(iv)

(v)

Required Advise the directors of Dundee how to deal with the above five issues in the accounts for the year ended 31 December 2009. You should base your advice on the underlying assumptions and qualitative characteristics contained in the IASBs Framework for the preparation and presentation of financial statements. (25 marks)

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5.

(a)

Trace the evolution of stand-alone environmental reports and explain why this development has occurred. (12 marks) Outline the activities involved in an environmental audit. (13 marks) (Total: 25 marks)

(b)

6.

Tracey Ltd (Tracey) and Park Ltd (Park) are companies which trade in a similar range of products on the cash basis. Their statements of financial position at 31 December 2009 were identical and contained the following information: Statement of financial position as at 31 December 2009 Assets Non-current assets Inventories Cash Equity Ordinary share capital Retained profit

000 2,800 840 350

3,990
2,000 1,990 3,990

To put into effect plans for expansion, each company needs to acquire a fleet of new lorries which will cost 998,600. Each lorry is expected to have a useful life of five years and, in total, their residual value is estimated to be 198,600. The directors of each company have entered into an arrangement with a London citybased financial institution to lease the lorries. The lease contract provides for an initial payment of 200,000, on 1 January 2010, and five further annual payments of the same amount commencing 31 December 2010. The interest rate implicit in the lease arrangement is 8% per annum. The forecast operating profits of Tracey and Park for 2010 are 594,000. This amount is before lease rental charges (if any) and depreciation of 400,000 on the non-current assets owned at 31 December 2009. The level of inventories is expected to remain unchanged during 2010. The directors of Tracey intend to account for the lease arrangement as an operating lease, whereas the directors of Park have decided to account for it as a finance lease.

(continued)

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Required (a) Prepare the forecast statements of financial position of Tracey and Park as at 31 December 2010. These statements should show the appropriate adjustments to cash and retained profit as the result of transactions undertaken during 2010. (13 marks) Identify and discuss three arguments in support of the imposition of compulsory accounting standards for financial reporting. Where appropriate, you should illustrate your answer by reference to the content of the accounts prepared under part (a), above. (12 marks)

(b)

Note: All calculations to the nearest 1,000.

(Total: 25 marks)

The scenarios included here are entirely fictional. Any resemblance of the information in the scenarios to real persons or organisations, actual or perceived, is purely coincidental.

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